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Financing Green Part II: The Role of Data in Financing Green Improvements

An In-Depth Look at Financing Options and Obstacles for Green Improvements in the CRE Industry
May 21, 2012
In Part I of Financing Green, available here, CoStar News looked at energy efficiency retrofit financing options available to owners, and also what investors, banks and lenders are looking for to overcome the uncertainty and inherent risk in funding these new and often under-tested technologies in the CRE industry. In Part II, Dr. Kontokosta discusses the critical role of data in the lending decision-making process.

The Role of Data in Overcoming the Uncertainty of Financing Green Improvements

Following the Second Annual Conference on Sustainable Real Estate hosted by NYU Schack Institute of Real Estate, CoStar News interviewed Constantine E. Kontokosta, PhD, PE, clinical associate professor and director of the Center for the Sustainable Built Environment at New York University Schack Institute of Real Estate. An expert on green buildings in his own right, Dr. Kontokosta is the founding director of the interdisciplinary research center at NYU focused on applied research, practice and technology in real estate and construction. He plays a critical role in advancing policy and finance issues related to green building technologies as a member of the executive team of the NYC Urban Technology Innovation Center. He has been named to the United Nations Environment Programme Sustainable Buildings and Climate Initiative, and is a member of the Clinton Global Initiative Scaling Sustainable Buildings Action Network.

Kontokosta is also principal and founder of the New York-based KACE Group, a real estate development and investment firm focusing on equity, sustainability and economic feasibility. The firm has more than 450 affordable and senior housing units intended to receive Energy Star or LEED certification. He has received numerous degrees in various fields, including a Ph.D. in urban planning from Columbia University, and has written several research papers on urban systems theory and smart cities, land use and sustainable development, and technological innovation. His paper, Greening the Regulatory Landscape, was published in the Journal of Sustainable Real Estate (JOSRE) and is available here.

Acknowledging that lenders continue to offer only unsecured loans to building owners for financing green retrofits, Dr. Kontokosta said an important thing that owners, service companies, and manufacturers of green technology can do to bring about changes needed to support the availability of more financing is to improve the amount and quality of data being collected on specific green building technologies and materials. This will lead to a better understanding of how buildings perform before and after a green retrofit, which then enable lenders to underwrite risks associated with such loans, reducing the cost of capital, and leading to more financing options available for making such improvements.

Dr. Kontokosta is currently studying this issue, with the goal of determining what type of data to collect for this effort, and the best way to analyze that data and then present it to those who would use it to improve decision-making. He is analyzing specific valuation components and validating how implementing specific green improvements can improve building performance and increase savings. By presenting his findings within statistically validated confidence ranges, he hopes that lenders will find the data more useful - and more effective for underwriting loans - rather than relying on expected or projected results.

Certain cities, such as New York and Washington DC, are requiring building owners to submit data on their buildings’ energy efficiency. At present, they are the only entities collecting and disseminating such data, and more should be done on both sides to report and utilize this important information.

Kontokosta compared the collection and reporting of this data with the government’s requirement for fast-food chains to display calorie info on menus, both serve the public good. Just as requiring Starbucks to display that a Venti Iced Peppermint White Chocolate Mocha has 680 calories will enable coffee drinkers to make more informed decisions, so too will collecting and disseminating the energy consumption of buildings help to educate the various stakeholders on building energy performance.

Demonstrating there is demand for sustainable real estate is tantamount to increasing funding for those sustainable improvements, noted Kontokosta. Collecting and presenting the data in a useable fashion will help increase the flow of capital by enabling lenders to analyze comparable data in deciding on funding and the cost of capital.

Cities can use the building performance information to aid in planning and policy decisions to target incentives for energy improvements and to guide future infrastructure investment. Owners can utilize the data in the decision making process as to what improvements would save them the most money and which ones might increase income. Tenants can evaluate and compare properties with respect to relative energy efficiency and incorporate that knowledge into leasing decisions. And appraisers should be looking differently at green buildings, not just as individual systems improvements, but as an overall investment in the future competitiveness of the building, and its cash flow.

In Part III of the Financing Green series, available here, CoStar News takes a look at real world issues that tenants and end users face in funding green improvements of their own.
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